While it deals with the trading
aspect of equivalence there remains
a major hole that the regulatory authorities have yet to fill and which is
causing the market to be worried—
namely reporting. At present swap
dealers in the EU are not required
to report transactions with non-US
people with the US trade repository,
a temporary rule which the CFTC
extended from its December expiry
to December 2020.

The path of least risk

However, in a strongly worded
statement issued in November the
CFTC said that it did not expect to
extend this relief again, expressing
concern that regulators had been
unable to reach agreement about
sharing swaps data or finding their
reporting requirements equivalent.

Participants believe it has a point.

“Regulators need to pay attention
not just to the effects on liquidity and trading but also to the
downstream effects on post-trade
processing” says Scott Fitzpatrick,
chief executive of Tradition SEF.

“For example, US and European
venues and participants have
different reporting requirements
to meet for their home regulators.

In the future—assuming equiva-lence—will a US entity trading ona venue in Europe, where the EUThe December statement madeno mention of the reporting issuewhich will not go away until regu-lators manage to get together andagree on a resolution. Certainly itis a headache the market could dowithout as 2018 and beyond offersa series of further potential globalchallenges. ECB tapering, risingrates, quantitative tightening, notto mention Brexit—all have thepotential to exert disruption on themarkets. Having wrinkles in anyequivalence deal could seriouslyhamper the ability of the market totrade in an efficient way. Treloarsays that potentially increasedvolatility places greater emphasison easier use of swaps.

“For banks, who have been easy
targets for fines the likelihood is
that, where possible, they will take
the path of least risk, based on
what they understand and their
ability to meet their regulatory
objectives,” he says.

The most likely action is for the
rules to go ahead in some shape of
form, with a period of no enforcement enacted to satisfy rule breakers to prevent any further serious
disruption.

“The markets remain global,”
says Radi Khasawneh, senior fixed
income analyst, TABB Group. “We
are running out of time but it is not
necessarily the end of the world
because people know who they
are going to be trading with and
the structure of competing venues.

No action relief could be a remedyfrom the US perspective - it wouldbe prolonging uncertainty but it isa good midway point.”Yet, as has been pointed out, thebest laid plans have been disruptedin the past.

Why the disparity?

The disparity in swap tradingvenue rules is partly a ques-tion of timing. Post-financialcrisis, the US was swift to in-stigate reforming regulationson swap trading venues whileEurope, with its sovereigndebt crisis, has lagged behind.“Fragmentation occurredbecause the EU was slower toimplement its G20 commit-ments than the US,” saysHammar. “It was a mismatchin timing. Under current regu-lations even if one US personwere to trade on a Europeanfacility that trading facilitywould have to register in theUS as a SEF and vice versa.It has caused many Europe-an trading venues to shunUS investors. The commonapproach, when implemented,should help fix the marketfragmentation caused byDodd-Frank.”The December SEF dealis the third leg of swapsequivalence in the post-crisisera. The CFTC already issuedequivalence for unclearedswap margins in October andhas similar equivalence rulesfor central clearing counterpar-ties (CCPs) in Europe, passedlast year. The hope it that thisone will clear the path to un-fettered swap between the USand Europe. And participantsare further hoping to resolveequivalence issues in Asia andother regions. Going global isthe key.